<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 1-9898
------
ORGANOGENESIS INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2871690
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
150 Dan Road, Canton, MA 02021
------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 575-0775
________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of registrant's Common Stock, par value $.01
per share, at November 2, 1999 was 30,466,491 shares (excluding treasury
shares).
<PAGE>
ORGANOGENESIS INC.
Index
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<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- ------------------------------ ------
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets
at December 31, 1998 and September 30, 1999...................... 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 1998 and 1999.. 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1999............ 5
Notes to Consolidated Financial Statements............................ 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 10
Signatures................................................................. 16
</TABLE>
In this report, "Organogenesis" "we" "us" and "our" refer to Organogenesis Inc.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
ORGANOGENESIS INC.
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,052 $ 755
Investments 12,789 13,255
Inventory 730 795
Other current assets 441 853
--------- ---------
19,012 15,658
Property and equipment -
Less accumulated depreciation of $9,339 and $10,650 7,605 11,163
Other assets 93 624
--------- ---------
$ 26,710 $ 27,445
========= =========
Liabilities
Current liabilities:
Accounts payable $ 1,036 $ 454
Accrued expenses 2,435 3,123
--------- ---------
3,471 3,577
Long-term debt - 17,863
Commitments (see notes)
Stockholders' Equity
Preferred stock, par value $1.00; authorized 1,000,000 shares:
Series C convertible preferred; designated 200 shares;
62 shares issued and outstanding as of December 31,
1998 and September 30, 1999, respectively - -
Common stock, par value $.01; authorized 80,000,000 shares:
issued and outstanding 30,479,719 and 30,551,491
shares as of December 31, 1998 and September 30, 1999,
respectively 305 306
Additional paid-in capital 124,342 127,516
Accumulated deficit (101,017) (121,013)
Treasury stock at cost, 40,000 and 85,000 shares as of
December 31, 1998 and September 30, 1999, respectively (391) (804)
--------- ---------
Total stockholders' equity 23,239 6,005
--------- ---------
$ 26,710 $ 27,445
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
ORGANOGENESIS INC.
Consolidated Statements of Operations
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
For the For the
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Research and development support
from related party $ - $ - $ 6,750 $ -
Product sales to related party,
royalties and other income 352 708 854 1,819
Interest income 392 238 785 745
----------- ----------- ----------- -----------
Total revenues 744 946 8,389 2,564
----------- ----------- ----------- -----------
Costs and Expenses:
Research, development and operations 4,913 5,412 12,698 16,073
General and administrative 1,521 1,607 3,933 4,775
Non-recurring, non-cash purchase of
incomplete technology - - - 900
Interest expense, net - 407 - 812
----------- ----------- ----------- -----------
Total costs and expenses 6,434 7,426 16,631 22,560
----------- ----------- ----------- -----------
Net loss $ (5,690) $ (6,480) $ (8,242) $ (19,996)
=========== =========== =========== ===========
Net loss per common share
- basic and diluted $ (.19) $ (.21) $ (.28) $ (.66)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic and diluted 29,521,312 30,478,115 29,255,956 30,466,603
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
ORGANOGENESIS INC.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the
Nine Months
Ended September 30,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,242) $ (19,996)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation 1,077 1,311
Issuance of stock options - 21
Amortization of warrants and deferred debt issuance costs
relating to long-term debt - 226
Issuance of treasury stock for purchase of technology - 900
Changes in assets and liabilities:
Inventory (219) (65)
Other current assets (303) (412)
Accounts payable (178) (582)
Accrued expenses 673 688
Deferred rent payable (28) -
----------- -----------
Cash used in operating activities (7,220) (17,909)
----------- -----------
Cash flows from investing activities:
Capital expenditures (992) (4,769)
Purchases of investments (15,224) (19,000)
Sales/maturities of investments 6,612 18,534
----------- -----------
Cash used in investing activities (9,604) (5,235)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 20,000
Deferred debt issuance costs - (575)
Proceeds from sale of preferred stock, net 19,117 -
Proceeds from sale of common stock 6,000 -
Proceeds from exercise of stock options 981 373
Purchase of treasury stock (247) (951)
----------- -----------
Cash provided by financing activities 25,851 18,847
----------- -----------
Increase (decrease) in cash and cash equivalents 9,027 (4,297)
Cash and cash equivalents, beginning of period 333 5,052
----------- -----------
Cash and cash equivalents, end of period $ 9,360 $ 755
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
ORGANOGENESIS INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
---------------------
The accompanying unaudited consolidated financial statements of
Organogenesis Inc., have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and changes in
cash flows for the periods presented. The results of operations for the nine
months ended September 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", (SAB 101) was issued December 3, 1999. SAB 101 summarizes certain
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is currently
considering this new guidance to determine what impact the guidance may have on
its accounting.
2. Inventory:
---------
Inventory is stated at the lower of cost or market, cost being determined
using the first-in, first-out method of accounting. Inventory consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Raw Materials $ 300 $ 284
Work in Process 430 511
----- -----
$ 730 $ 795
===== =====
</TABLE>
3. Other Current Assets:
--------------------
Included in other current assets is a net receivable due from Novartis of
approximately $213,000 at December 31, 1998 and $274,000 at September 30, 1999.
Cash payments were collected subsequent to September 30, 1999.
6
<PAGE>
4. Convertible Debt:
----------------
On March 31, 1999, we completed a financing of $20,000,000 through the
private placement of five-year convertible debentures and 400,000 warrants to
purchase common stock. The debentures are convertible at a fixed price of $14.50
per share at any time on or after March 30, 2000. Interest on the debentures
accrues at 7% annually, payable in cash, common stock (at the average trading
price for the twenty trading days preceding the due date) or any combination
thereof, at our option, semi-annually on September 30 and March 31 or on the
date any of the principal outstanding under the notes has been converted into
common stock. At our option, at any time on or after March 30, 2002, the
debentures may be prepaid by conversion of the principal into common stock at
the conversion price of $14.50, cash or any combination thereof and payment of
any accrued interest as described above, provided that the average per share
market value for the twenty consecutive trading days immediately preceding the
date of prepayment equals or exceeds $38.67 per share. The notes mature on March
29, 2004 and are payable in cash. The warrants grant the right to purchase one
share of common stock at the exercise price of $21.75 for each $50.00 in face
value of the convertible notes at any time before March 30, 2004. Approximately
$2,318,000 of the $20,000,000 financing is allocated to the estimated fair value
of the warrants and is included in additional paid in capital. This amount is
amortized as a non-cash charge to interest expense over the life of the
debentures using the effective interest rate method.
In May 1999, we filed a registration statement for 2,096,333 shares of
common stock, of which 2,046,333 relates to the conversion of the debentures,
payment of interest and exercise of the warrants. All shares have been reserved
for issuance. The Securities and Exchange Commission declared this registration
statement effective on May 27, 1999.
Debt issuance costs are included in other assets and are amortized to
interest expense over the life of the debentures using the effective interest
rate method.
5. Commitments:
-----------
Lease Obligations
We occupy our current premises under a facility lease for approximately
three-quarters of the building that expires on September 30, 2004. This lease
has three options to extend the term for an additional five years per option.
Starting November 1, 1999, we are leasing all of the remaining space at this
primary facility. Taxes, insurance and operating expenses are our responsibility
under the terms of the lease. We also have a second facility lease for warehouse
and office space that expires on December 31, 1999. In January 1999, we entered
into a noncancelable operating lease for certain office equipment.
In May 1999, we entered into another facility lease for approximately
62,500 square feet of additional office and warehouse space in Canton,
Massachusetts at an annual average base rent of approximately $421,875, plus
operating expenses. This lease has three options to extend the term for an
additional five years per option.
7
<PAGE>
Future minimum lease payments are as follows (in thousands):
1999 $ 791
2000 1,220
2001 1,240
2002 1,260
2003 1,246
Thereafter 1,019
------
$6,776
======
Construction-in-Progress
At September 30, 1999, we had approximately $3,821,000 in construction
in progress relating to expansion of our main facility. Additionally, we have
committed approximately $1.9 million for this build-out. The total project cost
is estimated at about $5.9 million.
Interest cost incurred during the period of construction in progress
relating to expansion of our main facility is capitalized. The interest cost
capitalized for the nine months ended September 30, 1999 was $113,000. No
interest was capitalized in 1998.
Series C Preferred Stock Commitment
At September 30, 1999, we had approximately 62 shares of Series C
convertible preferred stock outstanding. In the event that any Series C
preferred stock are outstanding on the mandatory conversion date of March 26,
2000, we have the option of redeeming any such outstanding Series C preferred
stock by: (1) paying cash equal to the product of the number of Series C
preferred stock outstanding multiplied by the stated value of $100,000 per
share; (2) issuing common stock equal to 1.15 of the stated value divided by the
average of the closing bid prices for the 20 consecutive trading days prior to
the mandatory conversion date; or (3) any combination of these methods.
Purchase of Technology
In April 1999, we purchased specific equipment and intellectual property
(consisting of patents and documentation only) of Baxter Healthcare Corporation
relating to the research and development for the design and manufacturing of key
mechanical components of an extracorporeal bioartificial liver device. The
purchase price consists of the reissuance of 50,000 shares of common stock held
in treasury. In May 1999, we filed a registration statement registering all
50,000 of these shares, 25,000 of which are subject to a one-year lock-up
agreement. Additionally, we may be required to make a future cash payment that
is contingent on the average closing price of our common stock over the twenty
consecutive trading days immediately prior to the earlier of the date we receive
FDA approval of an Investigational Device Exemption for a liver assist device or
January 1, 2003. We will have no obligation to make such future cash payment if
at any time during the period between April 2000 and the date such cash payment
is otherwise payable by us, the value of the shares of common stock issued to
Baxter is equal to or greater than $1,000,000. If this contingent payment is
required in the future, such cash payment will reduce the value of the 50,000
shares issued. Total consideration is $1,000,000 of which $900,000 is a non-cash
charge for the purchase of incomplete technology during the nine months ended
September 30, 1999, with the remainder of this purchase capitalized to property
and equipment. The purchase was made to strengthen our resources to develop the
technology. The charge to expense was due to the early stage of the technology
and that the technology has not provided proof of principle. Additionally, the
time and cost to prove this principal is not known. This program is expected to
be a long-term endeavor that will be evaluated periodically to determine future
spending levels. It is expected that development of a Liver Assist Device will
cost millions of dollars and take 8 to 15 years before we could develop a
product which might be approved for commercial sale. We do not currently have
the resources to fully develop such a product. It is our intent that once proof
of principle is established, we would seek funding or partnership for the
project.
8
<PAGE>
6. Treasury Stock:
--------------
In September 1998, the Board of Directors authorized a common stock
repurchase program. Repurchases are allowed through open-market transactions for
up to 500,000 shares that will provide us with treasury shares for general
corporate purposes. For the three and nine months ended September 30, 1999, we
repurchased 25,000 and 95,000 shares of common stock for an aggregate purchase
price of approximately $203,000 and $951,000, respectively. In April 1999, we
reissued 50,000 shares of common stock held in treasury related to the purchase
of technology (see "Purchase of Technology" note). We had in treasury 40,000
shares of common stock at a cost of $391,000 and 85,000 shares of common stock
at a cost of $804,000, at December 31, 1998 and September 30, 1999,
respectively. The stock repurchase program may be discontinued at any time.
7. Other Revenues:
--------------
During the first quarter of 1999, Novartis agreed to provide funding for
certain programs to be conducted by Organogenesis. We have recorded other income
from Novartis of $206,000 and $438,000 for the three and nine months ended
September 30, 1999 relating to our initiation of these programs. This amount is
included in "Product sales to related party, royalties and other income".
8. Research, Development and Operations:
------------------------------------
In addition to research and development, this cost category includes
expenses of our manufacturing and related operating support departments and
costs to manufacture products for research and for sale as we continue our
expansion.
<TABLE>
<CAPTION>
For the For the
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Research and development $ 2,828 $ 2,659 $ 7,279 $ 8,325
Operations and production 2,085 2,753 5,419 7,748
-------- -------- -------- --------
Total Research, development and operations $ 4,913 $ 5,412 $ 12,698 $ 16,073
======== ======== ======== ========
</TABLE>
9. Subsequent Event:
----------------
Subsequent to September 30, 1999, we received notice of grants to
support two research projects: (1) $2,000,000 grant under the Advanced
Technology Program of the National Institute for Standards and Technology to
support development of an effective bioartificial liver prototype for our
bioartificial liver device program. We expect this funding to be received over
the next two years; and (2) $100,000 grant under the Small Business Innovation
Research Program of the National Institutes of Health to support development of
our tissue engineered vascular graft. We expect this funding to be received over
the next six months.
In addition, we received notice from the Commonwealth of Massachusetts
that we were selected to receive a workforce training grant for approximately
$162,000 to support employee training. We expect this funding to be received
over the next six months.
On November 12, 1999, we closed on a credit facility providing for the
extension by a bank of one or more term loans aggregating up to $5,000,000 for
the purpose of financing the purchase of certain equipment, leasehold
improvements and other items. Borrowings under the credit facility are
collateralized by a security interest in the items financed.
Borrowings are permitted through September 29, 2000 and are payable
beginning December 29, 2000 in 12 equal quarterly installments with final
payment due on September 30, 2003. Interest only is payable during the draw
period. The interest rate is a fluctuating rate per annum that is equal to the
prime rate in effect from time to time, or we may elect that all or any portion
of any term loan be made as a LIBOR loan with an interest period of one month,
two months, three months or six months with the interest rate being equal to
LIBOR plus an applicable margin (175 to 225 basis points). We are required to
comply with certain covenants, including limitations on future indebtedness,
dividends and investments, and to maintain certain financial ratios pertaining
to minimum liquidity, tangible capital base, and debt service coverage (or,
alternatively, minimum cash balance).
9
<PAGE>
ORGANOGENESIS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-Q/A contains forward-looking statements that involve risks
and uncertainties. Forward-looking statements include information on:
. Our business outlook and future financial performance;
. Anticipated profitability, revenues, expenses and capital expenditures;
. Future funding and expectations as to any future events; and
. Other statements that are not historical fact and are forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties.
Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
can give no assurance that such plans, intentions or expectations will be
achieved. When considering such forward-looking statements, you should keep in
mind the risk factors and other cautionary statements in this Form 10-Q/A and in
other publicly available filings with the SEC, such as our Annual Report on Form
10-K for the year ended December 31, 1998. The risk and other factors noted
throughout this Form 10-Q/A could cause our actual results to differ materially
from the results contained in any forward-looking statements.
In Management's Discussion and Analysis, we explain the general
financial condition and results of operations for Organogenesis Inc. As you read
this MD&A, referring to our consolidated financial statements contained in Item
1 of this Form 10-Q/A may be helpful. Results of operations may vary
significantly from quarter to quarter depending on, among other factors, the
progress of our research and development efforts, the receipt of milestone and
research and development support payments, if any, from Novartis, product
revenues, manufacturing costs, the timing of certain expenses and the
establishment of additional collaborative agreements, if any.
Overview of Organogenesis Inc.
- ------------------------------
Organogenesis designs, develops and manufactures medical therapeutics
containing living cells and/or natural connective tissue. The company was formed
to advance and apply the emerging field of tissue engineering to major medical
needs. Our product development focus includes living tissue replacements, cell-
based organ assist devices and other tissue-engineered products.
Our Lead Product, Apligraf(R)
- --------------------------
On May 22, 1998, our lead product, Apligraf(R) living skin construct,
was approved for marketing in the US for the treatment of venous leg ulcers, a
type of chronic wound. Apligraf is the only manufactured product containing
living human cells to be approved for marketing through the FDA PMA process.
Novartis Pharma AG has global Apligraf marketing rights. Novartis
Pharmaceuticals Corporation launched Apligraf in the US in June 1998. Novartis
also markets Apligraf in Canada and is beginning the introduction of Apligraf
among key physicians in select European countries.
Apligraf(R) is a registered trademark of Novartis.
10
<PAGE>
The next large potential market for Apligraf is expected to be diabetic
foot ulcers. The Apligraf pivotal trial in diabetic foot ulcers has been
completed. We plan to submit a PMA supplement for diabetic foot ulcers to the
FDA within the next three months. An eighteen-patient study of Apligraf in the
treatment of epidermolysis bullosa, a genetic skin disease, has been completed
under an investigator-sponsored investigational device exemption. The data from
this study have been forwarded to the FDA. Data have also been presented and/or
published with Apligraf in the treatment of burns, wounds due to dermatologic
surgery and donor site wounds. A pivotal trial to assess the effect of Apligraf
on the cosmetic outcome of wounds due to skin cancer removal is underway.
Our Pipeline
- ------------
Our research pipeline includes Vitrix(TM) a living soft tissue
replacement product now in initial human clinical study and our bioartificial
liver and by-pass graft programs now in animal studies. We market an in-vitro
testing product, TestSkin II, and also have GraftPatch(TM) and engineered
collagen fibril technology as potential out-licensing opportunities. We have an
active and expanding business development program related to our products and
technologies.
Results of Operations:
- ---------------------
Revenues
Total revenues were $946,000 and $2,564,000 for the three and nine
months ended September 30, 1999 compared to $744,000 and $8,389,000, for the
same periods in 1998. Research and development support under the collaborative
agreement with Novartis was $6,750,000 for the nine months ended September 30,
1998. Product sales to related party, royalties and other income increased to
$708,000 and $1,819,000 for the three and nine months ended September 30, 1999,
compared to $352,000 and $854,000, for the same periods in 1998 due to increased
sales of product to Novartis and Novartis funding of certain programs. We expect
Apligraf commercial sales to increase. Interest income was $238,000 and $745,000
for the three and nine months ended September 30, 1999, compared to $392,000 and
$785,000 for the same periods in 1998. The three and nine month decrease was
primarily due to the difference in funds available for investment.
Costs and Expenses
Research, development and operations expenses: Our R&D and operations
---------------------------------------------
expenses were $5,412,000 and $16,073,000 for the three and nine months ended
September 30, 1999, compared to $4,913,000 and $12,698,000 for the same periods
in 1998. The increase is primarily due to personnel additions in the research,
development and clinical groups, as well as personnel additions in manufacturing
and quality systems. Activities for this period that account for the increased
costs also include expansion of Apligraf operations, the Apligraf diabetic ulcer
and cosmetic outcome pivotal trials, the Vitrix(TM) soft tissue replacement
preclinical program, and the liver assist device research program. Production
costs exceeded product sales due to the start-up costs of new product
introduction and the high costs associated with low volume production. We expect
production volume to increase and our margins to improve. We expect to continue
to expand manufacturing operations and advance the product pipeline during the
remainder of 1999 and into 2000.
11
<PAGE>
General and administrative expenses: Our G&A expenses increased to
-----------------------------------
$1,607,000 and $4,775,000 for the three and nine months ended September 30,
1999, compared to $1,521,000 and $3,933,000 for the same period in 1998. The
increase was primarily due to personnel additions and increased professional
fees.
Other costs and expenses: Included in costs and expenses for the nine-
------------------------
months ended September 30, 1999 is a non-cash charge of $900,000 relating to the
purchase of incomplete technology to be used specifically in our liver assist
device research and development efforts (refer to the commitments footnote to
the Financial Statements for a full description of this technology). The
purchase was made to strengthen our resources to develop the technology. The
charge to expense was due to the early stage of the technology and that the
technology has not provided proof of principle. Additionally, the time and cost
to prove this principal is not known. This program is expected to be a long-term
endeavor that will be evaluated periodically to determine future spending
levels. It is expected that development of a Liver Assist Device will cost
millions of dollars and take 8 to 15 years before we could develop a product
which might be approved for commercial sale. We do not currently have the
resources to fully develop such a product. It is our intent that once proof of
principle is established, we would seek funding or partnership for the project.
Interest expense was $407,000 and $812,000 for the three and nine months ended
September 30, 1999 due to the issuance of convertible debentures in March 1999.
As a result of the net effect described, we incurred a net loss of
$6,480,000, or $.21 per share (basic and diluted), and $19,996,000, or $.66 per
share (basic and diluted), for the three and nine months ended September 30,
1999, respectively, compared to a net loss of $5,690,000, or $.19 per share
(basic and diluted), and $8,242,000, or $.28 per share (basic and diluted), for
the comparable 1998 periods. We may incur additional losses as expenditures
continue to increase due to continued expansion of operations and research
programs.
Capital Resources and Liquidity:
- -------------------------------
Funds Used in Operations
At September 30, 1999, we had cash, cash equivalents and investments in
the aggregate amount of $14,010,000 and working capital of $12,081,000, compared
to $17,841,000 and $15,541,000, respectively, at December 31, 1998. Cash
equivalents consist of money market funds, which are highly liquid and have
original maturities of less than three months. Investments consist of securities
that have an A or A1 rating or better with a maximum maturity of two years. Cash
used in operating activities during the nine months ended September 30, 1999 was
$17,909,000, compared to $7,220,000 for the nine months ended September 30,
1998, primarily for financing our ongoing research, development and
manufacturing operations.
Capital Spending
Capital expenditures were $4,769,000 and $992,000 during the nine months
ended September 30, 1999 and 1998, respectively, primarily related to further
build-out of the current facilities to support Apligraf manufacturing and the
acquisition of laboratory equipment for expanded research and development
programs. We have committed approximately $1.2 million to expand our current
facility in the areas of Apligraf manufacturing, quality systems labs, and
packaging. We also plan to add a second facility in the future to enable further
expansion.
12
<PAGE>
Financing
From inception, we have financed our operations substantially through
private and public placements of equity securities, as well as receipt of
research support and contract revenues, interest income from investments, sale
of products and receipt of royalties. During the nine months ended September 30,
1999, financing activities provided additional cash and working capital of
$18,847,000 primarily from the sale of five-year convertible debentures and
warrants to purchase common stock that generated net proceeds of $19,425,000 and
the exercise of stock options of $373,000. Financing activities provided cash of
approximately $25,851,000 for the nine months ended September 30, 1998 from: the
sale of 200 shares of Series C convertible preferred stock that generated net
proceeds of approximately $19,117,000; an equity investment of $6,000,000 from
Novartis; and the exercise of stock options of $981,000.
At September 30, 1999, we had approximately 62 shares of Series C
convertible preferred stock outstanding. In the event that any Series C
preferred stock are outstanding on the mandatory conversion date of March 26,
2000, we have the option of redeeming any such outstanding Series C preferred
stock by: (1) paying cash equal to the product of the number of Series C
preferred stock outstanding multiplied by the stated value of $100,000 per
share; (2) issuing common stock equal to 1.15 of the stated value divided by the
average of the closing bid prices for the 20 consecutive trading days prior to
the mandatory conversion date; or (3) any combination of these methods.
Subsequent to September 30, 1999, we received notice of grants to
support two research projects: (1) $2,000,000 grant under the Advanced
Technology Program of the National Institute for Standards and Technology to
support development of an effective bioartificial liver prototype for our
bioartificial liver device program. We expect this funding to be received over
the next two years; and (2) $100,000 grant under the Small Business Innovation
Research Program of the National Institutes of Health to support development of
our tissue engineered vascular graft. We expect this funding to be received over
the next six months.
In addition, we received notice from the Commonwealth of Massachusetts
that we were selected to receive a workforce training grant for approximately
$162,000 to support employee training. We expect this funding to be received
over the next six months.
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Liquidity and Other Risk Factors
Based upon our current plans, we believe that existing working capital
and future funds from Novartis, including product and royalty revenue, will be
sufficient to finance operations into 2000. We will need additional capital
within the next year to continue under the current plan. However, this statement
is forward-looking and changes may occur that would significantly decrease
available cash before such time. Factors that may change our cash requirements
include:
. Delays in obtaining regulatory approvals of products in different
countries, if needed, and subsequent timing of product launches;
. Delays in commercial acceptance and reimbursement when product launches
occur;
. Changes in the progress of research and development programs;
. Changes in the resources devoted to outside research collaborations or
projects, self-funded projects, proprietary manufacturing methods and
advanced technologies; and
. Acquisition of a second manufacturing plant.
Any of these events could adversely impact our capital resources,
requiring us to raise additional funds. Management believes that additional
funds may be available through equity or debt financing, strategic alliances
with corporate partners, capital lease arrangements, or other sources of
financing in the future. There can be no assurances that these funds will be
available when required on terms acceptable to the Company, if at all. If
adequate funds are not available when needed, we would need to delay, scale back
or eliminate certain research and development programs or license to third
parties certain products or technologies that we would otherwise undertake
ourselves, resulting in a potential material adverse effect on our financial
condition and results of operations.
Year 2000
- ---------
The Year 2000 issue ("Y2K") refers to potential problems with computer
systems or any equipment with computer chips or software that use dates where
the year has been stored as just two digits (e. g., 98 for 1998). On January 1,
2000, any clock or date recording mechanism incorporating date sensitive
software which uses two digits to represent the year may recognize a date using
00 as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to manufacture product or process
transactions, send invoices or engage in similar business activities.
To address this situation, we conducted an assessment to identify and
determine the Y2K readiness of our systems. This assessment program focused on
three main functional areas, including:
. Information technology which addresses data, phone and administrative
systems;
. Embedded chip technology which addresses manufacturing systems, laboratory
instruments and plant maintenance systems with programmable logic
controllers with date functions; and
. Material suppliers, vendors and other third parties that address areas
that are critical to the manufacturing process, distribution of product
or other business processes.
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The task of assessment from a Y2K readiness perspective is 100% complete
and remedial action for noncompliant systems is substantially complete and will
be 100% complete before year end. In addition to the assessment of systems, key
vendors, suppliers and other third parties were identified and a survey form was
sent to each of these business entities to determine if their systems are Y2K
compliant. We have received responses from substantially all of our critical
vendors, suppliers, and other third parties. Y2K issues with our vendors,
suppliers or other third parties could delay the shipment and receipt of
critical supplies, potentially impacting production and operations. We
proactively addressed the Y2K issue with vendors, suppliers and other third
parties to minimize risk from these external factors.
Our Y2K project is substantially complete and the costs associated with
the Y2K issue is about $250,000, which includes the use of internal resources.
Working capital was used to fund these costs. Costs consisted primarily of
payroll costs for existing employees, including the information technology
group, which are not separately tracked, as well as certain hardware and
software upgrades and training costs. If we or key third parties such as
suppliers and customers are not Y2K ready, there could be an adverse effect on
our business, results of operations and financial condition. We believe that
with the implementation of the Y2K program the risk of significant interruptions
of normal operations is reduced. We have developed certain contingency plan to
address a situation in which Y2K problems do cause an interruption in normal
business activities.
Additional Cautionary Considerations:
- ------------------------------------
We are subject to risks common to entities in the biotechnology
industry, including, but not limited to, the following uncertainties:
. Market acceptance of our products, if and when approved, and successful
marketing and selling of Apligraf by Novartis;
. FDA approval of Apligraf for other indications and successful
registrations of Apligraf outside the US;
. Risk of failure of clinical trials for future indications of Apligraf and
other products;
. Compliance with FDA regulations and similar foreign regulatory bodies;
. Risk of manufacturing disruptions or production failures;
. Manufacture and sale of products in sufficient volume to realize a
satisfactory margin;
. Continued availability of raw material for products;
. Availability of sufficient product liability insurance;
. Ability to recover the investment in property and equipment;
. Protection of proprietary technology through patents;
. Development by competitors of new technologies or products that are more
effective than ours;
. Adequate third-party reimbursement for products;
. Dependence on and retention of key personnel;
. Year 2000 issues; and
. Availability of additional capital on acceptable terms, if at all.
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ORGANOGENESIS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Organogenesis Inc.
(Registrant)
Date: February 14, 2000 /S/ Philip M. Laughlin
----------------- ----------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 /S/ Donna Abelli Lopolito
----------------- ----------------------------------------
Donna Abelli Lopolito, Vice President
Finance and Administration, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
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